Personal Finances: Review and Revise your Life Insurance Policy in a Divorce
With a divorce comes countless financial obligations: alimony, child support, and attorney fees — not to mention new expenses and debts related to dividing a household. But separating from your spouse doesn’t just impact your wallet, it changes your life. That’s why it’s imperative you re-examine your life insurance needs and make appropriate changes to reflect your newfound single status. This is especially crucial if you have children.
Why? Because one of the most important and immediate issues to address is “ownership on existing life insurance policies,” says Craig Hyldahl, a certified financial planner with R.I.C.H. Planning Group, in Woodbridge, New Jersey. Whoever owns the policy controls the policy; neither the beneficiary nor the insured have any say in who gets the proceeds at the death of the insured,” he says. Only the owner dictates who the beneficiary is on a life insurance policy, – and that includes any beneficiary designations stipulated in a will.
For example, added Hyldahl, if a former spouse is listed as the beneficiary on the ex-husband’s life insurance policy, even though the new wife is listed as the beneficiary in the husband’s revised will, at his death the life insurance proceeds will go to the ex-spouse.
Figuring out all of your life insurance needs is almost like starting from scratch, noted Marvin Feldman, president and CEO of the Life and Health Insurance Foundation for Education (LIFE). The transition from a double- to single-person household will influence almost every financial calculation you make — starting with deciding whether you still need coverage. “Remember, one of the main reasons you purchased life insurance in the first place was to provide financial security for your immediate family,” Feldman says.
Though it may not be required in court, if you make alimony and child support payments, it is essential you have a life insurance policy to ensure these payments continue after death. Dawn Cardi, a prominent divorce lawyer and state and federal criminal defense attorney in Manhattan, suggests your life insurance policy be sufficient to cover your support obligations to your ex-spouse and children through college. Insist that your ex-spouse do the same.
If your children are young and/or you don’t trust the financial abilities of your soon-to-be ex-spouse, you can name a guardian of the property as a co-beneficiary with your ex-spouse who will get custody of the children,” she says. “Remember when selecting an amount that you will no longer have the other spouse’s assets and income.” Experts recommend buying “term” life insurance over policies, such as “whole” that accrue cash value, if you need to cover alimony and child support payments.
Term life insurance provides sheer insurance protection at a reduced premium compared to whole life insurance, an appealing benefit if you are not required by court to have a life insurance policy. You can also choose decreasing term insurance if you pay child support. In this policy, your death benefit gets smaller as your children grow older and are not as financially dependent.
But what if your ex-spouse is the one making alimony and child support payments to you? Make sure they have life insurance guaranteeing you support should they die. Be wary of ex-spouses who buy life insurance initially then change the beneficiary or lapse the policy by not paying premiums. Get a yearly confirmation from your ex-spouse that the policy is still in place and the beneficiaries have not been changed. It may be necessary to include a stipulation in the divorce agreement that orders the ex-spouse to not change the beneficiary and pay the premiums. If they don’t comply, penalties will result.
You need proper coverage too, even if you receive support — especially if you are now the primary caretaker for your children. If you died and your ex-spouse obtained custody of your children, they would endure the financial responsibility of single-handedly raising the children. Evaluate your options and decide who the best beneficiary should be. If your ex-spouse is remarried with two sufficient household incomes, you may consider naming your children as beneficiaries.
“This is where trusts can be a good option,” says Feldman. “They can help ensure that the money is used to support your children’s needs.” If your children are under 18, you will most likely need to set up a trust until they reach the appropriate age. You decide the friend, relative or institution that acts as the trustee. An ex-spouse can be named as a trustee, and they will be forced to handle the money in the child’s best interest.
Another critical life insurance issue to resolve in a divorce is securing alimony payments with life insurance. Says Hydahl, normal divorce settlements stipulate that the provider of alimony/child support payments secure life insurance on their lives’ in an amount equal to the present value of future support payments. “That is done to protect the recipient of these support payments in the event of an untimely death.”
That may seem logical. But not to Hyldahl. “Way too many times we see the owner of the life insurance policy be the provider of these payments, not the recipient. What guarantee does the recipient have that the provider of these payments won’t cancel the coverage or worse, change the beneficiary to a new spouse? Unfortunately, there is no guarantee.”
One final note regarding life insurance to secure support payments: if your settlement stipulates support payments for a specific length of time, say 15 years, insist on getting a term insurance policy that has a guaranteed, fixed premium for the same amount of time as the support payments. “This way you will know exactly what your payments will be, the premiums will be the least costly, and at the end of the 15 years you can cancel coverage,” says Hyldahl.
Make no mistake, reassessing your finances becomes essential during and after a divorce. Make sure you include insurance as part of your evaluation. “Reviewing and revising your life insurance plan is important, but full of complex decisions that may require the assistance of not just an insurance professional, but an attorney and an accountant as well,” says Feldman.
“If you’re suddenly in the unfamiliar position of having to make financial decisions on your own, don’t try a do-it-yourself approach. The stakes are way too high, especially if there are young children involved,” he advises.